Jul192013

Are homeowners happier than renters?

I am perhaps the most widely known renter in Orange County. I’ve been writing under the moniker Irvine Renter for over six years now. Are renters like me less happy that those who bought homes?

First, I want to point out I was not always a renter. Like many others, I bought a house (actually I designed and built it). I know the emotional satisfaction that can come from having a house to call my own. In my opinion and experience, there is an emotional quality to owning a house that is not replicated in a rental. When I owned my house, I spent hours tinkering in the yard with landscaping, and my house plants looked like a greenhouse. Since I became a renter, I’ve killed so many house plants that I quit buying them several years ago. The house plants for me were the manifestation of my spiritual connection to the property. I haven’t had that since 2000.

So do I regret renting? Not for a moment. I’ve greatly enjoyed the freedom renting provides, and given the realities of the housing bubble, I’ve enjoyed a higher quality of life as a renter than I would have endured as a loanowner — and by the time I was ready to buy again financially in 2003, I would have become a loanowner. The drain on my income to support a house payment would not have been worth what I would have given up. And without the compensation from appreciation, it would not have been worthwhile.

Of course, people in California came to realize they could have it all. Through mortgage equity withdrawal, they could have the nice, expensive house that they couldn’t really afford, and they could have all the trips, cars, and consumer goods they would ordinarily have to give up in order to make their house payments.

HELOC abuse and Ponzi living is a very seductive mistress. It offers the lure of the expensive house, and it promises the spending money to enjoy the house and the rest of your life. Further, you don’t have to pay for it because the house pays for it all. It shouldn’t be too surprising many people fell into this trap. Unfortunately, since it is a Ponzi scheme, it inevitably collapses, the borrower losses everything, and they must endure an unceremonious fall from entitlement.

Homeownership, the Key to Happiness?

By MICHELLE HIGGINS — Published: July 12, 2013

A growing body of research suggests that spending money on real estate doesn’t necessarily mean investing in contentment. Indeed, the conventional advice to cut back on vacations, restaurant meals and other extras in order to save money for a home may actually be detrimental to felicity. Experts in happiness — an increasingly popular field focused on the scientific understanding of emotional well-being — say that people are happier when they spend money on experiences instead of material goods, whether it be a new car or a bigger apartment.

“People are making so many trade-offs in order to have that home,” said Elizabeth Dunn, an associate professor of psychology at the University of British Columbia who studies consumerism and happiness. … when it comes to your overall happiness, “there are a lot of better things you could be putting your money toward” than real estate.

Now that the Ponzi borrowing lifestyle is gone, people really do have to make trade-offs. Many will still blithely assume home equity solves all problems, but as I pointed out in Will HELOC abuse be as prevalent this time around?, the rising cost of HELOC abuse caused by rising interest rates will make it far less desirable, and those that go Ponzi won’t last near as long before they implode.

“People still view housing as a central component of happiness and a critical aspect of the American dream,” Dr. Dunn said. “But there is little research to support that.”

It got so silly here in California during the housing boom that renters were actually looked down on as lesser people and lower class citizens. Perhaps there was a time prior to the housing bubble when becoming a homeowner required character and the discipline of saving, but all that was eliminated during the housing boom when anyone with a pulse could borrow as much as they wanted to get any house they chose.

A 2011 study of about 600 women in Ohio found that homeowners weren’t any happier than renters. … Indeed, homeowners spent less time on leisure activities with friends and reported that they derived some pain from homeownership. What exactly caused that pain wasn’t indicated in the study, but financial experts say that people who make the leap from renting to buying can be caught off guard by the nuts and bolts.

The reality of maintenance and repairs, and being ‘house rich but cash poor,’ can negate much of the perceived happiness people may have had about homeownership,” said Greg McBride, the senior financial analyst for Bankrate.com.

One of the reasons I provide a detailed, and I believe accurate, cost of ownership for each property I profile is to educate people on how much houses really cost to own. Most people underestimate the actual cost of ownership by 20% or more.

… the study indicated that by placing so much weight on the physical characteristics of the houses, including location, room size and architectural appeal, the students overlooked what ended up contributing most to their happiness — the quality of their social life.“What matters for our happiness,” Dr. Dunn said, “is what we do in the minutes and hours of our day.” When shopping for a home, she recommends asking yourself, “How will this purchase change the way I spend my time next Tuesday?”

Whether you have a maple or a walnut floor won’t have a big impact on what you’re doing on an average day, she said. On the other hand, if the house has no dishwasher, you may be committing yourself to spending half an hour a day washing dishes. “That aspect of your house will change what you do with your time,” she said.

My family has lived in more than a dozen rental properties over the years. I’ve come to the same conclusion that it’s how you spend your time that’s much more important than anything else. If I have a room I can set up as a home office, and if my wife and son are comfortable, I don’t care whether the property has high-end finishes or not. For most of the time I’ve lived in California, to enjoy the same quality of housing I was renting would require me to move to an undesirable location or pay a lot more money, which would cause me to give up other things. I was never willing to do that.

I chose to pay the large rental premium to live in Irvine because it’s close to everything I want, the shopping centers are first-rate, and the landscaping is beautiful. I never have to drive far, and any time I leave my house to run errands, I am surrounded by beauty, and I enjoy safety and pleasant public interactions. And none of this requires me to own anything.

… Moving farther inland would have meant a larger place for less money, but a much longer commute. “I can spend my time biking rather than driving to work,” she said. “That changes the way I use my time.”

The last year that I owned my house in Florida, I took a job that required me to commute 80 miles each way. Two and a half hours of my day was suddenly gone. I’ve never had a commute longer than 25 minutes since then, and I doubt I ever will.

Many people understand homeownership as serial trading up with a goal of arriving at some sort of real estate perfection. But that dream house may be more elusive than it seems.

“Like any possession, its impact on happiness diminishes over time,” said Ravi Dhar, a psychology professor and the director of the Center for Customer Insight at Yale School of Management. Citing a theory widely held by happiness researchers called hedonic adaptation, he said, “things give us more joy when they are first acquired than over time, as we adapt to them.”

No matter how nice a property is, over time, people come to take it for granted. We have friends who own a beautiful 3,000+ SF home in Oak Creek. As their financial condition improved and they could afford a nicer property, they actually began to dislike the house they were in. Perhaps it was their way of pushing themselves out of the nest, but I was astonished by how they were dissatisfied with what for most people would be an unattainable dream home. Happiness comes from being grateful for what you have, no matter your circumstances.

Buying a home is still considered an important step on the ladder to personal fulfillment. But Dr. Dunn isn’t convinced ownership is all it’s cracked up to be. “A very robust finding in psychology is people are highly motivated to justify their own choices,” she said. “It’s very hard to get people to admit they spent hundreds of thousands of dollars in a way not optimal for their happiness.”

Many of the commenters back at the Irvine Housing Blog in the early days were clearly happy about the illusion of wealth created by inflated prices. As prices turned south, the few of those early commenters who remained started talking more about having a place for their family and the other benefits of home ownership. Despite the obvious fact they bought the house for appreciation, they could never admit to themselves they made a mistake. Instead, they focused on the other benefits of ownership as solace for their poor decision.

There is nothing about home ownership that makes homeowners intrinsically happier. Ask any loanowner, and the ones who will be truthful with you and themselves, will admit that loanownership has not made them very happy. That being said, true homeowners, the ones who actually do own their homes with no debt, they get a special piece of mind that does bring additional happiness. That’s a goal to aspire to.

Turning $4,257 into $172,257

The former owners of today’s featured REO put $4,257 down, and they extracted $172,257 in mortgage equity withdrawal with a refinance in late 2007. Basically, they put the property to the bank. They couldn’t afford the mortgage that was triple their original 1998 mortgage, so they imploded, and this property became a foreclosure.

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5422 VILLA Way #8 Cypress, CA 90630

$434,900 …….. Asking Price
$132,000 ………. Purchase Price
8/7/1998 ………. Purchase Date

$302,900 ………. Gross Gain (Loss)
($34,792) ………… Commissions and Costs at 8%
============================================
$268,108 ………. Net Gain (Loss)
============================================
229.5% ………. Gross Percent Change
203.1% ………. Net Percent Change
8.0% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$434,900 …….. Asking Price
$15,222 ………… 3.5% Down FHA Financing
4.52% …………. Mortgage Interest Rate
30 ……………… Number of Years
$419,679 …….. Mortgage
$126,623 ………. Income Requirement

$2,131 ………… Monthly Mortgage Payment
$377 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$91 ………… Homeowners Insurance at 0.25%
$472 ………… Private Mortgage Insurance
$200 ………… Homeowners Association Fees
============================================
$3,271 ………. Monthly Cash Outlays

($520) ………. Tax Savings
($551) ………. Principal Amortization
$26 ………….. Opportunity Cost of Down Payment
$74 ………….. Maintenance and Replacement Reserves
============================================
$2,301 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$5,849 ………… Furnishing and Move-In Costs at 1% + $1,500
$5,849 ………… Closing Costs at 1% + $1,500
$4,197 ………… Interest Points at 1%
$15,222 ………… Down Payment
============================================
$31,116 ………. Total Cash Costs
$35,200 ………. Emergency Cash Reserves
============================================
$66,316 ………. Total Savings Needed
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